Race Discrimination and Mortgage Fraud

To support these discrimination claims, plaintiffs advanced several factual allegations. First, plaintiffs contended that the advertisements placed by United Homes featured minority consumers. Second, they alleged that the advertisements were placed in a newspaper that serves the West Indian community, but not in other newspapers published by the same chain, but distributed in white communities. Third, plaintiffs alleged that statements had been made to some of them indicating that United Homes had a customer base primarily of African-Americans and Hispanics, and that the company was trying to sell homes only in certain neighborhoods.

The Law

Judge Dearie held that these allegations, if proven, would suffice to support an inference of intentional discrimination in violation of 42 U.S.C. sec. 1981, 1982, and 1985(3). The court followed cases from other district courts holding that when a predator targets members of a particular racial group as victims of its predatory practices, the predator engages in impermissible discrimination. See, e.g., Hargraves v. Capital City Mortgage, Corp., 140 F.Supp2d 7; Matthews v. New Century Mortgage Corp., 185 F.Supp.2d 874. The court noted that targeting embodies stereotypes that members of the targeted group are especially susceptible to fraudulent practices.

The court then turned to plaintiffs' Fair Housing Act claims, and held that 'reverse redlining' claims are cognizable under the Fair Housing Act. As with the claims asserted pursuant to 42 U.S.C. sec. 1981, 1982, and 1985(3), the court cited no appellate authority, relying only on district court opinions from other districts. But the court concluded that the practices alleged in this case constitute a violation of section 3605(a) of the Fair Housing Act, which makes it unlawful for anyone in the business of residential real estate transactions to 'discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race … '

Whether the Second Circuit (or any other circuit) will accept the Barkley court's view of the applicable statutes remains to be seen. Particularly with respect to the Fair Housing Act, which explicitly prohibits a wide range of discriminatory activities, the failure of Congress to include targeting among those prohibitions may give pause to appellate courts confronted with allegations like those in Barkley. However reprehensible and harmful the predatory practices employed in this case, the practices did not make housing less accessible to minority consumers than to other consumers.

Nevertheless, unless and until the Second Circuit addresses the issue, Judge Dearie has provided victims of predatory practices with a route into federal court ' a route that might not be available if plaintiffs were limited to state law fraud claim.

Stewart E. Sterk is Editor-in-Chief of this newsletter.

The crisis in the subprime mortgage markets has brought to light many allegations of predatory practices by mortgage lenders and other participants in the housing industry. In Barkley v. Olympia Mortgage Co., NYLJ 8/28/07, p. 31, col. 3, Judge Raymond Dearie of the Eastern District approved a strategy that might permit some victims of the alleged fraud to obtain a federal forum, with the possibility of treble damages and attorneys fees: allege (and prove) that the predatory practices constituted a form of racial discrimination.

The Allegations

Plaintiffs in the Barkley case are all African-Americans who contacted United Homes about purchasing a first home. They allege that United Homes purchased defective homes at foreclosure sales, performed cosmetic repairs, and then resold the homes at highly inflated prices. The complaint alleges that United Homes worked with appraisers, who appraised the home at inflated prices, enabling lenders to obtain FHA insurance for loans that exceeded the value of the homes, and therefore to collect at inflated prices when borrowers defaulted. The complaint also alleges that United Homes offered the assistance of lawyers and lenders to speed through the purchase and mortgage process, giving the plaintiff-purchasers little opportunity to obtain independent advice. Perhaps concerned that they might be faced with a caveat emptor response to state law fraud claims, plaintiffs alleged that the various defendants ' United Homes, together with lenders, appraisers, and lawyers ' had targeted minorities as victims of the scam, and, in the process, had violated both federal civil rights statutes and the federal Fair Housing Act.

To support these discrimination claims, plaintiffs advanced several factual allegations. First, plaintiffs contended that the advertisements placed by United Homes featured minority consumers. Second, they alleged that the advertisements were placed in a newspaper that serves the West Indian community, but not in other newspapers published by the same chain, but distributed in white communities. Third, plaintiffs alleged that statements had been made to some of them indicating that United Homes had a customer base primarily of African-Americans and Hispanics, and that the company was trying to sell homes only in certain neighborhoods.

The Law

Judge Dearie held that these allegations, if proven, would suffice to support an inference of intentional discrimination in violation of 42 U.S.C. sec. 1981, 1982, and 1985(3). The court followed cases from other district courts holding that when a predator targets members of a particular racial group as victims of its predatory practices, the predator engages in impermissible discrimination. See, e.g., Hargraves v. Capital City Mortgage, Corp. , 140 F.Supp2d 7; Matthews v. New Century Mortgage Corp. , 185 F.Supp.2d 874. The court noted that targeting embodies stereotypes that members of the targeted group are especially susceptible to fraudulent practices.

The court then turned to plaintiffs' Fair Housing Act claims, and held that 'reverse redlining' claims are cognizable under the Fair Housing Act. As with the claims asserted pursuant to 42 U.S.C. sec. 1981, 1982, and 1985(3), the court cited no appellate authority, relying only on district court opinions from other districts. But the court concluded that the practices alleged in this case constitute a violation of section 3605(a) of the Fair Housing Act, which makes it unlawful for anyone in the business of residential real estate transactions to 'discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race … '

Whether the Second Circuit (or any other circuit) will accept the Barkley court's view of the applicable statutes remains to be seen. Particularly with respect to the Fair Housing Act, which explicitly prohibits a wide range of discriminatory activities, the failure of Congress to include targeting among those prohibitions may give pause to appellate courts confronted with allegations like those in Barkley. However reprehensible and harmful the predatory practices employed in this case, the practices did not make housing less accessible to minority consumers than to other consumers.

Nevertheless, unless and until the Second Circuit addresses the issue, Judge Dearie has provided victims of predatory practices with a route into federal court ' a route that might not be available if plaintiffs were limited to state law fraud claim.

Stewart E. Sterk is Editor-in-Chief of this newsletter.